Droughts in California, epic cold weather in Georgia, the polar vortex over the Midwest and the East Coast—how is this bad news relevant to your public company disclosure obligations? Of course I’m talking about the impact of climate change on your company’s business. Whether your company chooses to give its shareholders climate change disclosure isn’t a partisan question; the Securities and Exchange Commission (SEC) has publicly stated that it thinks, for some businesses, the impact of climate change is material to investors. This makes the impact of climate change relevant public company disclosure. The plaintiffs’ bar, no doubt, agrees.
There has been a mini-storm on the topic of public company climate change disclosure just recently. The dust-up was sparked by the publication of a study undertaken by Lawrence Taylor, a private citizen and retired database developer. Taylor’s study involved the systematic examination of the annual reports (10-K’s) of 3,895 U.S. public companies. Taylor was looking for climate change disclosure. To his credit, Taylor did not just look for statements that would evince the acceptance of climate change as a reality. He included in his analysis any mention at all of climate change. Taylor found that only 27 percent of companies mentioned climate change.
(Interested in how your company or your peers scored? Taylor has made his data available to the public in a searchable format. Check out his website at www.decisionfacts.com.)
Should more than 27 percent of companies have mentioned climate change in their disclosure? Possibly yes, though this is not to suggest that the right percentage is necessarily 100 percent either. In 2010, in response to investor and Congressional pressure, the SEC issued interpretive guidance on the question of climate change disclosure. The guidance was styled as a reminder that companies are required to provide their shareholders with disclosure about items that are material to the business. When it issues guidance, the SEC does not create new legal requirements (or liability) per se. The guidance does, however, put companies on notice that the SEC is taking a close look at a particular type of disclosure.
In the case of climate change, the SEC’s guidance included its view that the potential materiality of climate risk goes beyond mere physical impact. In its interpretive release, the SEC made a point of talking about regulatory impact, e.g. the costs companies incur when complying with mandates like climate-related legislation and international accords. When considering where climate disclosure might appropriately appear in a company’s disclosures, the SEC focused not just on risk factors. It also noted the possible applicability of climate change disclosures to the business description section, legal proceedings and management’s discussion and analysis of financial conditions and results of operations (MD&A).
Even in light of the broad nature of the SEC’s guidance, it is unlikely that 100 percent of public companies should include a discussion of climate change risk in their public company disclosure. On the other hand, given the broad nature of the SEC’s guidance, 27 percent seems a bit low.
In the current annual report season, it is a good idea to take a fresh look at the impact of climate change and climate regulations on your company. You might also review what your industry peers are doing in an effort to navigate the difficult path of robust, and not boilerplate, disclosure for your shareholders.